In the world of mutual funds, options are seemingly endless. There are load funds, incubated funds, passively managed funds, and the list goes on. How does the average investor fare in this sea of choices?Not well, it appears.
AdvisorOne recently published an article that discussed how mutual fund investors often choose the worst fund categories at the most inopportune times. For example, in one study, mutual fund investors reduced their returns by 0.15% due to selling funds at the wrong times. This often occurs when investors don’t adhere to an investment policy, and shift money out of stocks and into bonds during volatile markets. This is the exact opposite of what should occur. Investors should purchase stocks instead of selling them, thereby rebalancing their account while maintaining a long-term risk exposure.
Article Spotlight: Read the Article
Another common problem with mutual fund providers is the use of “incubated funds.” For example, fund companies might start 30 funds, and after a year or two, take the successful funds and advertise them to investors while killing the funds that did not do well. Investors, who often rely on past performance, see only the successful data and flock to these fund managers, resulting in huge net inflows of money for the company. Quite often, these funds subsequently underperform and disappoint investors.
The article ends by saying that individual investors tend to base investment decisions substantially on factors such as recent return numbers, and their investment performance suffers as a result. They conclude (and we agree) that removing emotion and personal bias from investment selection is more likely to lead to long run investment success. If you take one thing away from this post, remember, past performance is no guarantee of future results.